HK losing sheen makes Cathay business model obsolete

Being known as Hong Kong’s flagship carrier may best represent what’s wrong with Cathay Pacific Airways Ltd. The city of about 7.3 million people may no longer be capable of supporting a premium-service airline, especially when the 48 passenger-service operators based across the border in mainland China routinely launch price wars.

Cathay reported its first annual loss since 2008, skipped a second-
half dividend and warned that the year ahead may not be any better as travelers continually hunt for cheaper fares. The troubles are yet another economic blow for a city grappling with fewer Chinese tourists, declining retail sales and falling rankings in quality-of-life surveys.

“Cathay and Hong Kong have been dwarfed, completely overwhelmed, by China’s growth,” said Shukor Yusof, founder of aviation consulting firm Endau Analytics in Malaysia. “China doesn’t need Hong Kong as a gateway. Its position has become a lot less important than 10 years ago.”

Cathay’s net loss totaled HKD575 million (USD74 million) in 2016, while sales dropped 9.4 percent to HKD92.8 billion, the airline said Wednesday. Passenger yields, the money earned from flying a traveler for one kilometer, dropped 9.2 percent to 54.1 Hong Kong cents last year.

Losses from fuel hedging totaled HKD8.46 billion last year, compared with HKD8.47 billion in 2015. Cathay said it expects more hedging losses this year, though they should be lower. The company’s American Depository Receipts fell 3.7 percent on Wednesday, after the Hong Kong-listed stock dropped 1.4 percent.

In response, Asia’s largest international airline announced a three-year “corporate transformation” plan to reduce costs by as much as 3 percent. Chief Executive Officer Ivan Chu wants to increase passenger capacity by as much as 5 percent a year through measures including nonstop flights to new markets.

“Our commitment to Hong Kong and its people remains unwavering,” Chairman John Slosar said. “We’ve got to become better, lower cost, more agile in terms of how we approach the market.”

That approach needs to consider the booming aviation market next door. Breakneck economic growth and rising incomes are creating more first-time fliers who want to see the world, and the Communist Party leadership is adding more capacity to get them there.

China plans to build more than 50 airports by 2020 to accommodate the crowds, raising the nation’s total of civil transport facilities to 260. The government wants to build six airport clusters nationwide and elevate airports in Beijing, Shanghai and Guangzhou to international hubs. Construction of a second airport serving Beijing already is underway.

The combined number of Chinese passenger and cargo airlines increased 28 percent to 55 in just five years. The number of planes in the air more than tripled in a decade to 2,650, according to the Civil Aviation Industry Statistics Report.

“Chinese carriers are giving better prices,” said Mohshin Aziz, an analyst at Maybank Investment Bank Bhd. in Kuala Lumpur. “China’s No. 1 priority is to get as many international flights for the next five or so years. Because of this, Hong Kong is becoming less attractive as a hub.”

That’s shown by an economy that grew by just 1.9 percent last year, compared with China’s 6.7 percent. Retail sales by value fell for 21 straight months as fewer Chinese tourists visited Hong Kong for shopping, eating and taking trips to Macau.

Not helping matters is the perception that Hong Kong isn’t holding up well in comparison to its Asian neighbors when it comes to quality of life. The city ranked 71st in the index released this month by consulting firm, Mercer, a unit of Marsh & McLennan Cos. That trailed Singapore and Tokyo, though was still ahead of Beijing, Shanghai and Guangzhou.

Tourism Board Chairman Peter Lam has predicted that the number of visitors to Hong Kong will decline 2.2 percent this year after falling 4.5 percent last year. To try to keep pace, Hong Kong is pushing ahead with its plan to build a third runway at the international airport. The new budget waives HKD137 million in license fees for travel agents, hotels and restaurants, and the government said it will introduce a bill offering tax concessions to attract aircraft leasing companies.

Su Baoliang, a Beijing-based analyst at Sinolink Securities Co., said that may not be enough. “Hong Kong used to be the gateway to Asia, but now you have three hubs rising from the Chinese mainland,” Su said. “For Cathay, there’s very little leeway for adjustment. They’re in a dead end.” Bloomberg